At the end of November 2011, George Osborne, Chancellor of the Exchequer of the UK government, announced his intention to engage pension funds to help finance an overhaul of the UK’s aging infrastructure. However, with the UK Treasury estimating that 200 billion pounds of investment would be needed by 2015, the government would need to look beyond its own shores and target overseas funds to secure the long-term future of UK infrastructure.

Shortly after Osborne outlined this strategy, Lou Jiwei, CEO of sovereign wealth fund China Investment Corporation (CIC), expressed an interest in hearing more, citing the stable economic and regulatory environment as two of the primary reasons why his fund would consider investing in UK infrastructure schemes.

Building on this early enthusiasm, CIC confirmed recently that it had taken an 8.68 percent stake in the holding company that owns Thames Water, a UK utility company that provides sewerage services to 14 million customers and water to 8.8 million in London and the wider Thames Valley.

However, despite this agreement, some analysts remain unconvinced that this will herald a new wave of additional investment from other funds. Those analysts continue to question how attractive an investment proposition the UK really is to Chinese investors.

Recent research from EC Harris may offer some fresh perspective on this issue. The study, entitled “Investment in Transport Infrastructure”, ranked 17 countries across the globe based on their ability to attract inward private investment for large-scale transportation infrastructure schemes. The research, which took into account a broad range of indicators, including political stability, ease of doing business and potential return, placed the UK in ninth position overall. This put the UK behind more developed rivals, such as the USA, Canada, France and Germany and perhaps surprisingly, emerging economies like Chile and Brazil.

Whilst the final results may have been somewhat mixed, market experience suggests that foreign investors will always be interested in the UK, thanks in no small part to the mature legal system in place and the UK’s willingness to engage with outside parties. Furthermore, there are some strong examples in the recent past that demonstrate why Chinese pension funds should be attracted to UK infrastructure projects.

In 2010, the UK government leased the High Speed 1 rail line to a Canadian consortium for 2.1 billion pounds over a 30 year contract, and this deal is already delivering a steady financial return. That said, to be fully confident of securing investment from pension funds, including CIC, the UK will need to ensure the right incentives are in place to prevent investors from choosing other markets.

In the EC Harris research, one of the major obstacles identified as a factor that deterred investors from the UK was the length of time it often takes for major planning applications to receive consent. If we consider the example of London Heathrow’s Terminal 5, the scale of the problem becomes all too clear – eight years passed before BAA got the green light to build the new terminal, including a four year public consultation period.

The current UK administration recognizes this problem and has taken steps to streamline this process, cutting over 1,000 pages of planning policy into a simple 60-page document. It has also introduced a presumption in favor of development providing it meets sustainability criteria. This revised approach could be key, as Chinese investors who are already considering a plethora of different options are likely to look elsewhere if it seems like opportunities in the UK are moving too slowly.

In late November, Lou Jiwei was also quite explicit around the need for the UK government to introduce pro-investment policies to help create the right incentives for inward investment. In an open column in the Financial Times, Lou suggested that Chinese pension funds had an appetite not only to act as a contractor in UK infrastructure schemes, but also to “invest in, develop and operate projects”.

Some of the incentives he called for included fiscal adjustment, reduced taxes or low-interest bank loans and whilst it’s unlikely all of these will be implemented, there’s no doubt that introducing some of these measures would help to build assurance with Chinese funds that the UK is serious about working with them as partners.

Another high-profile scheme that pension funds are likely to consider is the recently-approved high-speed rail link (HS2) that will shorten the travelling time between London, the Midlands and Northern England. However, before a Chinese pension fund will invest in such a scheme, changes will be required in how the sector is regulated. For example, migrating to a system that actively encourages single-point responsibility for the operation of each rail line would help to drive efficiencies while also removing barriers for companies to invest. Similarly, developing a commercial framework that maximizes the potential of non-fares income would also help to strengthen the appeal of a scheme that funds will already be familiar with, having seen their own country invest heavily in this segment.

Indeed given the experience China has in this space, banks and sovereign wealth funds may be prepared to finance HS2, particularly if a consortium of Chinese contractors and manufacturers bid to build the new line.

Fundamentally, investors from China will want to see greater assurance that they are not just acting as a cash-cow to help support a struggling economy. The UK government must take steps to assure private partners that they will not have to bear disproportionate levels of risk and that contracts will be set up in such a way that they will deliver maximum return on this upfront investment.

As EC Harris’ research indicates, the UK is still somewhat of a challenger brand when it comes to competing with the likes of Germany, Canada and the USA for private funding. The harsh truth is that China does not need to invest in the UK and unless appropriate incentives are in place, there is a danger that these funds could turn their attention elsewhere.

Mark Prior is head of Transportation at EC Harris. Weibin Xu is a partner with EC Harris Asia.